Annuity

Planning for retirement can never begin too soon but whether you are 25 or 65, basic principles apply and should guide your decision-making.

The goal for investors should be this: To generate enough consistent and sustainable retirement income to cover basic living expenses after paying any federal, state or local taxes and allowing for any gifting for estate or charitable purposes.

How do you do that? Start by making sure you understand the language of investment and the meaning of retirement.

For our purposes, “retirement” is the start of the period when the money you earn from a job (household salaries, wages and bonuses, etc.) do not cover basic living expenses. One or both spouses might be working full- or part-time, but for most investors, the way you manage your finances changes when a gap between earned income and expenses first appears.

So what’s “retirement income?” More

If you’ve been reading my blog, by now you already know Longevity Annuities are a unique way to “insure” your retirement by providing a guaranteed lifetime income starting at an age you select.

The newest player in the annuity marketplace is the Qualified Longevity Annuity Contract, or QLAC, and it provides very specific tax benefits. (To learn more about what QLACs are, check out “What Every Baby Boomer Should Know – Introducing QLAC.”)

Let’s delve into the value of the tax benefits QLACs provide. Intuitively one would expect significant savings by reducing the required minimum distributions (RMDs) from your retirement plan by 25%. This is because the investor is deferring not only the interest or investment return, but also deferring the principal (which the investor was previously available to deduct).

To point out the taxes on principal, I often ask knowledgeable people in the field, “What’s the rate of return on the IRA’s RMDs if: (1) the investments earn, say, 3%, and (2) the 65-year-old investor lives to age 95?”

Cutting to the chase, the answer is around .5% after tax. This means the investor barely gets his or her money back after tax. More

This is the second in a series of articles about QLAC, which began with “What Every Baby Boomer Should Know – Introducing QLAC.”

A lot has changed since the first article came out. Additional insurance companies have received approval of their QLAC products in various states. Financial writers are beginning to write about QLAC with generally favorable stories.

While the business is still in its infancy, investors will want to begin making plans for distributing their IRA or 401(k) and will want to (1) have an estimate of what QLAC can provide in terms of guaranteed income, and (2) know when enough insurance companies are offering QLAC to create a competitive market.

How much guaranteed lifetime income can an investor purchase from a QLAC?

The answer depends on the investor’s age and gender (and whether income is paid over one or two lifetimes), the age income will start, and whether the investor elects to provide beneficiary protection before the income starts. More

Ever since the IRS released regulations in July 2014 about QLACs (defined below), I’ve been making strong and positive statements about this new investment vehicle. I’ve stated that it’s “the most important change in retirement plans since the 401(k) was invented,” and “every Baby Boomer with retirement savings will need to consider a QLAC as part of his/her plans for retirement income distributions.”

These statements are in stark contrast to those who suggest that a QLAC is simply a way for high net worth investors to defer taxes on retirement distributions they don’t need.

Over the coming months, I intend to write about QLACs, provide real-life examples, and describe the QLAC marketplace, all with a goal to educate readers about QLACs. But for today, let’s start with this introduction to QLAC so that you can understand the significance of what’s to follow in coming months. More